This is the 24th in a
series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the
Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This article discusses proposed regulations released by
the Internal Revenue Service (the IRS) to provide guidance on fees imposed by the Act on health insurers and self-insured health plan sponsors. These
fees will help fund the Patient-Centered Outcomes Research Institute (the PCORI), a nonprofit corporation established by the Act.
About the PCORI
The PCORI’s mandate under the Act is:
to assist patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence
concerning the manner in which diseases, disorders, and other health conditions can effectively and appropriately be prevented, diagnosed, treated,
monitored, and managed through research and evidence synthesis….
The PCORI is governed by a 21-member board of governors, appointed by the U.S. Government Accountability Office. The directors of the Agency for
Healthcare Research and Quality and the National Institutes of Health, or their designees, are also members of this board. PCORI’s budget for 2011 was
On April 25, 2012, the PCORI’s board amended the corporation’s research agenda and authorized $30 million in funding over two years for 50 pilot
projects that “address methods for engaging patients in various aspects of the research and dissemination process.”
The PCORI is funded in part through the Patient-Centered Outcomes Research Trust Fund (the Trust Fund).
The New Fees in General
The Act added new sections to the Internal Revenue Code (the Code) to fund the Trust Fund through fees imposed on health insurers (Section 4375) and
self-insured plan sponsors (Section 4376). For most insurers and self-insured health plan sponsors, the first payment will be due July 31, 2013.
Under the Act, both the Section 4375 and Section 4376 fees will not apply in plan years ending after September 30, 2019.
Section 4375 imposes on each specified health insurance policy for each policy year ending after September 30, 2012, a fee equal to the product of $2
($1 in the case of policy years ending before October 1, 2013) multiplied by the average number of lives covered under the policy. Section 4376
imposes a fee on the sponsor of a self-insured plan equal to the product of $2 ($1 for plan years ending before October 1, 2013) times the average
number of lives covered by the plan in a plan year.
For any plan year that ends in any government fiscal year that begins on or after Oct. 1, 2014, the fee may be increased based on the percentage
increase in the projected per-capita amount of “national health expenditures” as most recently published by the Secretary of Health and Human Services
before the beginning of such fiscal year.
Employers do not have to pay the fee for their insured health plans, but can expect to see their health insurers try to pass along this new expense.
This article primarily focuses on the responsibilities of self-insured plan sponsors for the fee imposed by Section 4376.
Because Sections 4375 and 4376 are found in Subtitle D of the Code dealing with excise taxes, these “fees” are really excise taxes, and will be
reported and paid by insurers and plan sponsors on an IRS excise tax form.
Covered and Noncovered Self-insured Health Plans
Under the proposed regulations, sponsors of the following types of self-insured health plans are generally responsible for paying the fee:
- Retiree-only plans (whether or not other provisions of the Act apply)
- Health reimbursement arrangements (HRAs)
- Medical and prescription drug plans
- Dental or vision plans (so long as no separate election or premium is applicable)
- Flexible spending accounts (FSAs) that do not provide “excepted benefits”
An FSA generally provides “excepted benefits” if the employees that it covers are also eligible to receive medical benefits under the plan sponsor’s
plans and the FSA is funded solely by the employee’s salary deferrals or if the contribution of the employer does not exceed twice the employee’s
salary deferrals (or $500, if greater).
Plan sponsors are generally not responsible for paying the fee as to the following:
- Expatriate-only plans
- FSAs that provide “excepted benefits”
- Health savings accounts
- Employee assistance programs, wellness programs, disease management programs (as long as “significant benefits in the nature of medical care
or treatment” are not provided)
Calculating “Average Number of Lives Covered”
The proposed regulations enable sponsors of self-insured plans to choose one of three methods to calculate the “average number of lives covered” for
purposes of determining the Section 4376 fee:
- Actual Count Method: The sum of the lives covered for each day of the plan year is divided by the number of days in the plan year.
- Snapshot Method: The total lives covered on one day in each quarter (or an equal number of dates for each quarter) is divided by the sum
of the number of dates on which a count was made. The number of lives covered on a date can be determined by (i) totaling the actual number of lives
covered on such date; or (ii) adding (a) the total number of participants with self-only coverage on such date and (b) the product of 2.35 and the
number of participants with other than self-only coverage on such date.
- Form 5500 Method: This method uses information on the plan sponsor’s Form 5500 to calculate average number of lives covered. If the plan
offers only self-only coverage, the average number of lives covered is determined by adding the total number of participants reported on Form 5500 at
the beginning of the plan year and the total number of participants reported at the end of the plan year and then dividing that sum by two. If the
plan offers dependent coverage as well as self-only coverage, the average number of lives covered equals the total number of participants reported at
the beginning of the plan year and the total number of participants reported at the end of the plan year. (The adding of participants at the beginning
and end of the plan year is intended to account for the average of participants plus additional nonemployee lives.)
Plan sponsors must choose a single method for the entire plan year, but may alter the method used from one plan year to the next.
The proposed regulations allow plan sponsors to use any reasonable method for calculating the average number of covered lives during the initial year
for which the Section 4376 fee is payable.
Payment of Fees on Self-Insured Plans
Under the proposed regulations, plan sponsors of self-insured plans subject to the Section 4376 fee will be required to report and pay the fee once a
year using Form 720, the Quarterly Federal Excise Tax Return, which will be revised to reflect the new fee. The Form 720, which can be filed
electronically, will be due by July 31 each year to report and pay the fee for plan years that end in the preceding calendar year. Quarterly payments
and semimonthly deposits, which otherwise apply to excise taxes, will not apply to the fee. The proposed regulations do not permit plan sponsors to
engage a third party to act on its behalf for purposes of reporting and paying the fee.
If a plan sponsor has more than one self-insured plan (such as a medical plan and an HRA), the plan sponsor can treat the plans as if they are one plan
and pay a single fee.
Generally, if a self-insured plan is sponsored by more than one member of a controlled group, the entity named as plan sponsor in the plan would file
the Form 720 for all members of the controlled group. If, however, a plan sponsor is not designated in the plan, each member of the controlled group
whose employees participate in the plan would be required to file a Form 720 as to its own covered employees and other covered individuals.
Reliance on Proposed Regulations
The preamble to the proposed regulations provides that they may be relied upon pending the issuance of final regulations.
Will the Section 4375 and 4376 Fees Be Affected by the Supreme Court’s Decision on the Constitutionality of the Act’s Individual Mandate?
In lawsuits brought by 26 state attorneys general, two private citizens and the National Federation of Independent Business, the U.S. Supreme Court
heard arguments in late March over constitutional questions raised by the Act, including whether the Act’s mandate that individuals purchase health
insurance is authorized by the Commerce Clause of the Constitution.
If the Court strikes down the individual mandate, it must decide whether to (i) determine which parts of the Act must fall with the individual mandate
and which parts can be severed and stand independently; or (ii) invalidate the entire Act. The Obama administration has argued that the individual
mandate is necessary for the Act’s insurance market reforms to work as intended. The government concedes that “guaranteed issue” and “community
rating” portions of the Act should be invalidated if the individual mandate is found unconstitutional, but argues that other portions of the Act are
unrelated to the individual mandate and should survive.
Opponents argue that Congress deliberately removed a severability clause from an early version of the Act, that the individual mandate is the very
heart of the Act and that the Act’s complexity and sweeping reordering of healthcare mitigate against picking the parts of the Act that should
survive. Better to strike down all of the Act and let Congress rewrite the law, say the 26 states.
If the Supreme Court agrees that the individual mandate is unconstitutional and cannot be severed from the rest of the Act, the Section 4375 and 4376
fees would be invalidated along with the PCORI. The Court’s decision is expected this June.